Why Government Institutions Fail to Deliver on Their Promises

December 16, 2013

Public choice theory shows that government solutions not only fail to solve most problems but often make problems worse, says Veronique de Rugy of Mercatus Center in testimony before the House Oversight and Government Reform Committee.

Public choice theory applies economic analysis to politics.

Economists operate under the assumption that individuals act according to self-interest. So, public choice theory applies that same assumption to government actors.

Similarly, individuals are driven to act prudently when buying, investing and saving in the marketplace. But those same incentives do not exist within government management. Because government decision makers are using other people's money rather than their own, they do not face the same type of risk that an individual faces when making a decision. Moreover, there is little, if any, reward for acting wisely, effectively or efficiently.

On top of all of this, individuals are busy. They lack incentives to monitor the government sufficiently, because they make the calculation that is not worthwhile to expend the time necessary to follow issues effectively.

De Rugy cites a Department of Energy's loan program (the program that funded Solyndra) as an example of how this operates:

Loan programs transfer risks from lenders to taxpayers. And because the loan is guaranteed, banks have less incentive to evaluate loan applicants thoroughly. Taxpayers are stuck bearing the risk of these programs.

Loan guarantees create incentives to shift resources toward subsidized products, because they become safe assets which can then attract private capital, independently of the project's actual merits. More viable projects are left without funding, while subsidized projects thrive.

Political incentives emerge from loan guarantees, leading to cronyism.